California Income Tax on Retirement Income

The Honest Truth About California's Retirement Taxes

California has the highest state income tax in the country (1–13.3% depending on bracket). But not all retirement income is taxed equally. Some is exempt entirely. This guide explains what you actually owe.

What's EXEMPT (You Don't Pay CA Tax)

Social Security: 100% Exempt

If Social Security is your only income, you owe $0 California state income tax. Period.

Example: Age 70, collecting $3,500/mo Social Security = $42,000/yr. California tax: $0.

Military Pensions: Up to $20,000/Year Exempt (NEW 2025)

California recently added a military pension exclusion: up to $20,000/year of military retirement pay is exempt from state income tax.

Example: Retired Captain collecting $3,500/mo military pension = $42,000/yr. First $20,000 exempt, $22,000 taxed = ~$1,650 state tax (assuming 7.5% bracket).

Note: This is a new benefit (2025+). Many military retirees didn't know about it until recently.

Government Pensions (Partial)

California excludes certain government pensions (federal, military, railroad retirement). If your pension is from government service, it may be partially or fully exempt. Check with a CPA.

100% VA Disability: Full Property Tax Exemption (Not Income)

Note: This exempts property tax, not income tax. But it's valuable. 100% disabled vets pay $0 property tax in California.

What's TAXED (You Pay Full CA Tax)

IRA/401(k) Withdrawals

Fully taxable at California income tax rates (1–13.3% depending on amount).

Example: Age 72, required minimum distribution of $50,000 from IRA. Entire $50,000 is California taxable income.

Capital Gains

Fully taxable at the same rates as ordinary income (CA doesn't distinguish long-term vs. short-term).

Example: Sell stock at $100K profit. Entire $100K taxable in California at your marginal rate (could be 9.3% or higher).

Rental Income

Fully taxable. If you own rental property and collect rent, California taxes all of it.

Pension from Private Employer

Fully taxable. Corporate pensions, union pensions, non-government pensions are all California taxable income.

Typical Retirement Income Scenarios

The Hard Truth About High Income Tax

California's tax brackets are progressive and steep:

• 1–2%: Income under $10K
• 2–4%: $10K–$25K
• 4–6%: $25K–$60K
• 6–8%: $60K–$300K
• 9.3%: $300K–$663K (marginal rate for high earners)
• 13.3%: Over $663K (top bracket)

For a retiree with $100K taxable income: effective rate ~7%, paying ~$7,000/year in state income tax.

Comparison: How California Compares to Other States

California is not the worst (some states tax Social Security), but it's definitely not the cheapest (Texas, Nevada, Arizona are better for high-income retirees).

Why Retirees Still Move to California

Despite high taxes, retirees move to California because:

• Social Security is tax-exempt (huge advantage for lower-income retirees)
• Weather & lifestyle offset tax burden (subjective, but real for many)
• Property tax frozen at Prop 13 rate (even with Prop 19 transfer, still low)
• Healthcare access (excellent)
• Family proximity (if already in CA)

Net result: For a retiree with $60K Social Security (tax-free) + $40K pension (taxed), California effective rate is only 3–4%, which is competitive with other states.

Next Steps

1. Calculate your retirement income mix: How much SS, pension, IRA, capital gains? 2. Estimate your CA tax using a calculator or CPA. 3. Consider whether CA tax burden affects your decision to move to San Diego. 4. Remember Prop 19: CA income tax is one lever; property tax savings (via Prop 19) is another.